The Impact of Good and Bad Debts on Your Credit Score

Did you know that there are good debts and bad debts? You may have heard this term before, but do you really know what it means? So, which types of debts fall into each category? And more importantly, how can you make sure that you’re making the most of your good debts and avoiding the bad ones? Stay tuned to find out!

What’s the difference between good debt and bad debt? Good debt is money you borrow to invest in something that will give you future value or benefits. Bad debt, on the other hand, is when you take out a loan to make a one-time purchase that doesn’t offer much in return.

A home loan is an example of a good debt. Even though you’ll have to borrow money and pay interest on the mortgage, you’ll be in control of your own home or an investment property that can produce income and/or save taxes for you. Not only this, but the value of your property may rise over time, allowing your equity to grow as well.

When you borrow money to invest in equities or cryptocurrency, start a business, or finance your education, you’re taking on Good Debt. You may profit from these assets if you take out good debt (though every investment comes with risk, and it should be thoroughly assessed). Borrowing to pay for education may also be regarded as Good Debt since it might help you get a better job.

A credit card is often used as the example of Bad Debt. While carefully-managed credit card debt may be useful for day-to-day expenditures, missed payments might result in interest charges that build over time until you are no longer able to repay them comfortably.

If you don’t pay back a short-term loan on time, it might be labeled as a bad debt. You can borrow money to go on vacation or for a wedding, but you’ll only get interest payments for the rest of the term rather than returns in terms of lifelong memories and Instagram-worthy photographs.

Although it may seem counterintuitive, having debt does not mean you automatically have bad credit. If you are keeping up with your repayments on time and haven’t borrowed more than what you can afford, a good debt may actually help improve your credit score. This is because adding to your credit history by responsibly using money demonstrates that lenders can trust you to handle future borrowing.

However, if you can’t keep up with your payments on your bad debts or apply for several credit cards in a short amount of time, a lender may be less willing to offer you more money. You may be charged increased interest rates for a loan or even have your credit applications rejected outright as a result of numerous loan rejections. Multiple loan denials might severely damage your credit score, making it harder to obtain loans in the future.

You could be able to improve your credit score over time by finding a way to clear some of your bad debts. You may be able to use a balance transfer credit card or a debt consolidation loan to make progress towards paying off your outstanding obligations, at which point you may consider lowering your credit limit or canceling cards you don’t need.

Now that you understand the difference between good and bad debt, it’s important to keep in mind how these debts can impact your credit score. Good debt can help improve your credit score over time, while bad debt will have a negative effect.

Bad credit can be extremely frustrating and make it difficult to get approved for loans or mortgages. However, don’t despair! There are credit repair experts who can help you remove negative listings from your credit file and improve your credit score. Contact us today to learn more about our credit repair service and how we can help you fix bad credit.